Why would anyone invest in Ocado?

I am totally bemused by the news that Ocado is planning a £1bn float after the election.

Ocado has raised more than £350m since it launched a decade ago. It has heavyweight founders (a trio of ex-Goldman’s bankers), and heavyweight backers (John Lewis and Tetra Pak billionaire Jorn Rausing for example).

But despite this, it still hasn’t ever made a profit. Not a penny. Instead, according to Ambrian analyst Philip Dorgan, it has managed to make pre-tax losses of over £300m on sales of £1bn.

Supporters say it is only a matter of time given how fast sales are growing (25% a year on a like-for-like basis apparently). But even with sales growing nicely, it is hard to see why anyone would invest.

The first worry is the basis of the business itself. Ocado is currently little more than an expensive taxi service for Waitrose. It may dispatch orders from its own hi-tech distribution hub in Hertfordshire. But it dispatches Waitrose goods and is known by consumers to be a delivery arm of the upmarket supermarket, and nothing else.

But Ocado isn’t Waitrose. They say they have an excellent relationship with Waitrose, and maybe they do.

But if it was that great, wouldn’t Waitrose just want to buy the company themselves rather than letting it be flogged to the general public and setting up their own in-house competitor, Waitrose Deliver? You’d think. What happens if the two ever part ways? Ocado will be one great big distribution hub with nothing to dispatch.

Then there is the confusion over the hub itself. It was vastly expensive and we are told that, as The Observer puts it, “it is not short of capacity.” It could, says Ocado, handle sales of more than £1bn – rather than the mere £400m forced upon it last year.

But if that’s so, then why on earth is the company talking about building another massive £100m hub, something that would mean more depreciation and more debt and presumably delay the much-waited-for day of profit even further into the distant future? As I say, totally bemusing.

Back to Philip Dorgan. His view on the whole thing as quoted in The Observer is this: “Ocado begins with an o, ends with an o and is worth zero.” It will be interesting to see what the market thinks.

  • Tony

    I am not entirely sure where you source your facts from. Currently, I live approximately 15 miles outside of the M25, and my parents live in Manchester. Both of us are able to select from the full catalogue of Ocado product Range.
    As for a second distribution centre, I would imagine that the short lead-times and escalating costs of delivering to an ever expanding geography have to be taken into consideration. Afterall, my local newsagent has the capacity to sell more newspapers, but the news might be old news if the paperboy has to cycle to Birmingham to deliver it, so his brother opened one nearer.

  • Merryn

    Tony – good point -should have said that it is only inside the M25 that Ocado has, as I understand it, the exclusive right to deliver Waitrose goods – ie until the contract ends Waitrose Deliver can’t compete in London.

  • me

    i work for ocado and belive that with all our hard work it will pay off we all work very hard at ocado and its like a big family and we will all do our best to make sure ocado works and it will another site would be great news as we could then start to send lorrys further and open spokes past leeds which we carnt do from hatfield due to our driving hours so thanks to all the customers that make ocado great we will deliver im sure

  • mark bowker

    Get your bloody facts right before printing trash like this please. Jobs are at stake here!

  • Michael Lewis

    Mark – what are you talking about? If a company has never made a profit and presumably won’t be paying a dividend, then why should people buy shares in it? Speculative reasons at best. I can think of dozens of mining companies that for the same speculative risk may offer order of magnitude better returns. It is in a competitive industry – the sort of things you can buy online can be bought from alternative suppliers. Then those goods for which you want to view – you pop into the supermarket. In fact, I’d say the last thing you want in such circumstance is an ‘upmarket’ delivery – the sort of weekly shopping goods you can order online you can order from Tesco, Sainsbury and the like. For what you want to view and buy at the supermarket itself – a trip to Waitrose it is…. fail to see if there is really a huge market for what Ocado are offering. If they start making money, I’ll be proved wrong.

  • Garry Mackay

    We have seen this all before….no profits, the promise of profits, new paradigm, new valuation methodologies, the illusion of growth tomorrow etc……there may be jobs at stake but if a company continually makes losses, something will give eventually….

  • colin taylor

    I think the key point that would frighten me is the founders are ex Goldman Sachs.

    If they don’t think its a goer then they are perfect for “creating” a package that can be flogged off with an IPO to the public and institutions to get there money back.
    Any business with only one customer is a potential disaster

  • Tim Roberts

    Yet another brilliantly logical editorial from MSW.

    Sometimes I think the MW staff members (oh, and Robert Peston) are the only realists left on the planet. And of all the commentators only MW has the balls to pour cold water on these widely touted dud business ideas designed to take money from the unwary.

    I’d always suspected that the Ocado operation was quite pointless – doubly so now Waitrose has its own service. As I understand it no retailer (Tesco, Iceland, Curry’s, Staples etc) makes money from the clicks, only from the bricks. So shops work, the internet doesn’t. (Though you might chose to support your shop with an internet service as part of your promotional and marketing mix, no-one has yet convincingly demonstrated you can run a viable business as an internet shop alone.)

  • John M

    Thank you MSW, another brilliant article with thorough analysis. My better half used to work for Ocado and we have been wondering for years when it will go belly up. It won’t anytime soon, if enough gullible “investors” give them money so they can continue running a subsidised delivery service for Waitrose.

  • Michael Lewis

    “no-one has yet convincingly demonstrated you can run a viable business as an internet shop alone”

    Amazon.

Merryn

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